Woodside Petroleum gave a small demonstration of the golden rule at work when it casually dipped into its cash pile and paid $4.6 billion for the bulk of Apache Corporation’s Australian assets.
Given that the oil price had plunged during the months leading up to the transaction being reported in early December and it’s a fair bet that Woodside was able to drive a hard bargain, not just because of the price fall but also because it was the potential buyer with the cash to spare.
What happened between Woodside and Apache was both a deal which satisfied both parties, and an early warning that more deals will flow as companies with access to gold (sorry, cash) go shopping for assets being offloaded by companies hit by the falling oil price.
A more sophisticated way of describing the unfolding process is to say that the oil sector is about to enter a period of intense M&A activity – a time when mergers and acquisitions dominate the industry.
In Australia, that means it’s time for a roll call of the potential predators and prey with Woodside well placed to keep on buying thanks to strong cash flows from LNG exports with gas prices, so far, suffering less damage than oil.
Elsewhere, it is a similar story with a handful of extra zeroes on the deals, with the mega-majors such as Shell, ExxonMobil and Chevron, rummaging around the rest of the oil patch to see what bargains might be available, such as scandal-riddled BP.
The starting point for the M&A game which is getting underway is to construct two lists, with one containing the names of companies with valuable assets but insufficient cash to fully development those assets, and another list comprising cash-rich companies with an eye of growth.
Top of the local list of companies with cash now, and assured cash in the future, are Woodside and Oil Search. Top of the list of companies under pressure because the oil price has caught them with partially built projects (a sort of pants down experience) is Santos.
Woodside and Oil Search, luckily for them, have done their building. They have finished, profitable projects, which means management can sit back and listen to the “k’ching” of the cash register as the moolah drops in.
Santos – unfortunately for a company which never seems to get its timing right – has an incomplete LNG project in Queensland, a fact which is causing investors great concern, a fact which can be checked against the company’s dramatic share price collapse.
In what can only be described as panic selling the value of Santos has plunged almost 50% over just 32 trading days on the Australian Securities Exchange.
From being a business valued at $12.9 billion on October 30 Santos shrivelled to a business valued at $6.8 billion, a result of its share price falling from $13.12 to a 12-month low of $6.96 on December 15.
Santos has recovered some of its lost ground to trade more recently at around $8.19, but that simply means that it is now a business value at $8 billion which still close to half the $15 billion it was valued at when the stock traded to its 12-month high of $15.32 as recently as August 25.
The rapid price slide suffered by Santos is a comment on the effect of the oil price fall, but it is also a comment on investor concern that the company has made a mess of its finances and might need to raise fresh equity from its shareholders.
For The Slug it does not require too much imagination to picture potential predators dusting off their Santos files to see whether it is indeed a bargain, or whether a merger move now (before the Queensland LNG projects proves that it will work as promised) would be the equivalent of trying to catch a falling knife.
At a market value of $31 billion, and with cash to spare, Woodside could easily snap up Santos if in the mood for a spot of adventure in the world of coal-seam LNG – but so could Oil Search which has held its ground relatively well to now be valued at $12 billion, or 33% more than shell-shocked Santos which was once a much bigger business.
The key to what happens next is how long the oil-price slump lasts.
Back in 2008 when oil fell into a hole the collapse was reversed so quickly that few deals were done.
This time around, with Saudi Arabia talking tough, the mood is different and while buyers are wary of the next leg down, and sellers are praying for a price recovery, the scene is being set for a blizzard of stress-related transactions which could reshape the oil world.
